Apple CEO talks Einhorn ‘sideshow,’ margins

Tim Cook vows not to make ‘crappy’ products; will not wage proxy war

By

DanGallagher

SAN FRANCISCO (MarketWatch) — Apple Inc. does not see itself solely as a hardware company and does not plan to wage a proxy battle against hedge-fund giant David Einhorn over a proposal to issue preferred stock, CEO Tim Cook told a group of investors Tuesday morning.

Cook made those comments during a relatively rare appearance at an investment conference — this one sponsored by Goldman Sachs in San Francisco. The appearance came as investors are increasingly clamoring for Apple
AAPL, -0.80%
to return more of its bulging cash pile to shareholders — as well as in the face of growing worries about how the highly profitable company can maintain its margins as competition ratchets up. Read “What do Apple investors want?”

Shares of Apple closed down about 2.5% to $467.90 on Tuesday. The stock had risen 5% since Einhorn first announced his campaign and lawsuit against the company last week, but shares remain well below their peak of $700 in late September.

Gene Munster of Piper Jaffray wrote that Cook’s comments gave him “greater confidence that there will be a slight increase to the dividend when Apple reports the March quarter.” He maintained a buy rating and $767 price target on the stock in a note to clients.

On the Einhorn matter, Cook said that while Apple will “thoroughly study” Greenlight’s proposal, he believes the lawsuit is “a silly sideshow” and a waste of shareholder money. He added that Apple will not devote resources to a proxy battle over the matter. Read: Apple sued by Einhorn over stock proposal.

“Frankly, I find it bizarre that we would find ourselves sued for doing something good for shareholders,” he said.

He added that Apple would seek shareholder approval for any such issue of preferred stock regardless of the ultimate fate of the second proposal on the proxy statement for its Feb. 27 annual meeting. That proposal would simply eliminate Apple’s ability to grant such “blank check” preferred stock without shareholder approval.

Asked about the company’s “aggressive pricing” on products like the iPad, Cook said Apple does not consider itself to be solely a hardware company. The company launched its iPad mini in late fall at $329 — against several smaller tablet rivals, including the Kindle Fire from Amazon.com
AMZN, +0.24%
which starts at $199. Even with the price premium, Apple told investors in its latest quarterly filing that the gross margin on the iPad mini was “significantly below” the company’s average product margin.

“Because we’re not a hardware company, we have other ways to make money and reward shareholders,” Cook said, noting that Apple sells software and services and sees itself as a “platform company.”

Cook did not comment specifically on rumored plans that the company might build a low-end iPhone for emerging markets but promised that “the only thing we will never do is make a crappy product.”

Apple investors could see cash

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Telis Demos has details of a novel plan from billionaire hedge-fund manager David Einhorn that could create a windfall of cash for Apple investors.

A report by Morgan Stanley issued prior to Cook’s appearance said Apple’s current share price appears to reflect an expectation for a 4% decline in earnings over the long term, with investors expecting losses in market share and margin declines.

“In addition to iPhone market expansion through new products and carrier partners, Apple’s entry into new markets can help shift investor perception of long-term growth,” wrote Morgan analyst Katy Huberty in a note to clients.

To a question about whether Apple will push the iPhone to larger screen sizes, Cook said size was only one facet of the user experience with a smartphone. “What Apple does,” he said, “is sweat every single detail.”

He said the customer experience “is always broader than that displayed by a single property.”

Cook was heading to Washington D.C. after the conference, where he will sit as a guest of First Lady Michelle Obama at the State of the Union address on Tuesday night.

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